COVID-19 and Commercial Real Estate: What We Know, What We Don’t

The coronavirus pandemic (COVID-19) has not only impacted the physical health of humans around the world, but the health of the U.S. economy as well. The stock market has fallen about 33 percent from its February highs, and unemployment is estimated to rise to between 20 percent and 30 percent — though no one knows the true fallout yet.

Because we’re still in the thick of it.

The Centers for Disease Control and Prevention (CDC) reported earlier today that the number of U.S. cases of coronavirus, a contagious respiratory illness, had reached 33,404 and the total number of deaths nationwide had risen to 400. The CDC expects that figure to climb much higher in the days and weeks to come.

Efforts to prevent the virus from spreading have included everything from air travel bans to shelter-in-place orders and the closures of many non-essential businesses where people are likely to gather. Though the exact response to COVID-19 has been left to the states and cities, many have issued wide-sweeping orders that force offices, retailers, casinos and restaurants to shut their doors.

Worries ahead for retail, restaurants, hospitality

Aside from airlines, the sectors that will arguably suffer most from coronavirus-prompted closures are hotels, casinos, retail and restaurants. States like California, Nevada, Illinois and New York have taken drastic measures to curb the virus’ spread, which includes the shuttering of all non-essential businesses.

Grocery stores, drugstores, banks and gas stations can remain open, while most other retail has either been forced to close or has closed voluntarily. Meanwhile, many restaurants throughout the country can only accommodate takeout or online orders, with dine-in orders prohibited.

Industry-wide conclusions

Brett Butler, Senior Director in Stan Johnson Company’s Newport Beach, Calif., office says commercial real estate’s tangible attraction may play a role in a near-term drop-off of sales and projects. This is especially likely, he asserts, as there are many questions surrounding the fate of not only entire industries, but how projects and sales will be handled in this environment.

“The potential issues are with deals that require a physical presence,” he says. “Think about properties that are under construction. Are crews still on-site? And what about deals that are in the due diligence phase. Can we still get inspections completed? If local governments are furloughed, what happens to the developer who can’t get rezoning approval, or sign-off on inspections or permits?

“These are the types of issues that could cause developers to default on construction loans or miss a critical deadline turning a property over to a tenant.”

There are many unanswered questions in a situation that seemingly changes hour by hour. The biggest ones that need to be answered are how to quell panic and thwart this virus as quickly as possible. Until then, the commercial real estate industry — like the hotels, retailers, restaurants, office tenants and multifamily residents it supports — waits for word on when businesses can reopen. Which, if any, industries will receive bailouts, what short-term remedies will be put in place, and how will lenders react to all of the above?